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More To The Picture: Jobs Growth Slows, But Data Hold Positive Hints For Economy

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September 1, 2017

(Friday Market Open) Jobs growth slowed in August and the government downwardly revised numbers for June and July. But the picture isn’t completely negative. The types of jobs created in August send a favorable signal about the economy.

Total August jobs growth of 156,000 reported Friday came in below estimates for around 180,000, and hourly wages rose just 0.1%, the Department of Labor said. The unemployment rate rose to 4.4% from the previous month’s 4.3%. Meanwhile, the government lowered June and July jobs growth by a total of 41,000. That said, job gains averaged a healthy 185,000 for the three months between June and August.

The positive news was in the types of jobs created in August. Leading the way was manufacturing, with 36,000 jobs added. The auto industry was the main contributor to this growth. Construction jobs rose 28,000. Professional and technical services positions climbed 22,000 and healthcare increased 20,000. Mining jobs also rose. It’s always good to see construction and manufacturing job growth, which implies that the U.S. economic machine continues to roll along. Professional services and healthcare are other parts of the economy we like to see growing.

The job area that led all others in July — food services and drinking places — rose just 9,000 in August, compared with 53,000 in July. As we’ve noted in the past, there’s nothing wrong with such jobs, but often they don’t turn into careers. It’s important to see job growth in key trades with bigger paychecks.

One other takeaway from the report: These aren’t the types of jobs and wage numbers that would necessarily have the Fed thinking about slamming the brakes. Chances of a rate hike by the end of the year remained near 37% after the report came out, according to CME futures. In that sense, slower jobs growth might actually prove positive for the stock market, because a blowout jobs number might have had investors thinking about Fed action.

There seems to be more appetite for risk the last few days, and Thursday’s action offered a good illustration. Along with a nearly 3% rise in the Nasdaq Biotechnology Index (NBI), all but two S&P 500 (SPX) sectors picked up ground as the index rose for the fifth consecutive session. The two that didn’t were utilities and telecom, which are often thought of as “safe havens.” Healthcare easily led all sectors — with a boost from biotech (see below) — and materials, info tech, and real estate also showed up on the leaderboard.

As the SPX rose, the VIX fell more than 5% to a three-week low below 11. That’s about where it stood before volatility took off after tensions about North Korea hit the headlines. Those tensions aren’t likely to disappear any time soon, but the end of joint U.S./South Korean military exercises on Thursday perhaps provided investors a little breathing room. Speaking of Asia, some good news came out earlier today when a private survey showed China’s manufacturing activity topping expectations.

It could be interesting to watch the performance of VIX, gold, bonds and other defensive measures as the market nears its close Friday to see if people begin seeking protection from potential geopolitical situations ahead of the long weekend. Don’t be too surprised if volatility starts percolating by later this afternoon.

Aside from any potential geopolitical flare-ups, next week is likely to switch some of the focus back to Capitol Hill, as senators and congressmen arrive back for a busy September after a long recess.

The administration made more statements Thursday about possible tax reform, with end of year a possible target. Any signs of progress there could give stocks a boost, with a particular focus on major multinational and information technology companies that might benefit from tax repatriation. Tech likely got a shot in the arm Thursday from these hopes. Detailed plans, however, might not be revealed until the end of September, news media reported.

Congress also finds itself under pressure to deal with budget and debt ceiling issues. The government has a Sept. 29 deadline to get the debt ceiling raised, and any signs of delay could rattle the stock market. One school of thought, though, is that Congress might find a way to cooperate on this one as part of the effort to help Harvey victims.

The data calendar is a bit light next week, with factory orders on Tuesday and wholesale inventories on Friday arguably the most important reports. Keep an eye on automotive stocks today as major car companies release monthly results for August.

After sliding for a few days even as hurricane winds forced the shutdown of thousands of barrels of Gulf of Mexico production, crude oil futures jumped more than 2% Thursday before leveling off Friday morning. Meanwhile, gasoline futures continued to roll up big gains (see below). Look to see if any profit taking surfaces at the end of the week after gasoline’s big rally.

Treasury Yields

FIGURE 1: TREASURY YIELDS REFUSE TO FOLLOW THE LEADER.

Ten-year Treasury yields remain near their lows for the year, and took another hit Thursday from tepid July PCE inflation data. Odds of a third Fed rate hike this year remain around 37%, according to CME Group futures. The weakness in bond yields contrasts with recent strength in the S&P 500 Index (SPX), represented here by the purple line. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Could Harvey Wash Away Cheap Gas? U.S. retail gas prices haven’t averaged above $3 a gallon since mid-November 2014, and now stand at $2.51, according to the Energy Information Administration (EIA). Though past isn’t precedent, average retail gas prices rose from $2.65 the week before Hurricane Katrina in 2005 to $3.11 a week later, and stayed near $3 for another month before easing off. Katrina and Harvey hit in different places, and the Texas coast where Harvey landed is arguably even more energy industry-intensive than Louisiana, where Katrina made its landfall. Any long-term rise in gas prices ultimately could affect consumer spending on other items, but it’s still early to start predicting exactly how that might play out.

Just Over the Horizon: It’s a little more than a month until Q3 earnings season begins, and Wall Street analysts are gazing into the future and offering their predictions. S&P Capital IQ projects 6.3% average earnings per share growth for S&P 500 companies in Q3, down from nearly 11% growth in Q2. The firm projects year-over-year gains in Q3 for nine of 11 sectors, led by energy (+124%), information technology (+10%), and industrials (+8.1%). The weakest growers could include telecom services (+0.4%), utilities (-1.3%), and consumer discretionary (-1.5%). The firm projects full-year earnings to increase by 10.6% in 2017. Remember, though, that the final quarterly earnings growth number has a recent history of beating pre-quarter estimates.

Biotech Bounce: Biotech, part of the S&P healthcare sector, has been racking up gains. The Nasdaq Biotechnology Index (NBI) climbed another 2% Thursday to bring its three-month advance to 16%. The drivers are multiple, including an accelerated pace of U.S. Food and Drug Administration (FDA) product approvals, a wave of industry mergers and acquisitions, and clinical trial advances, according to a recent report by Business Insider. Biotech’s strength might also indicate renewed confidence among some investors about investing in sectors where the risk/reward equation is higher. Typically we tend to see this sort of pattern in times of economic growth. Info tech is also outpacing the overall market over the last month. There’s still some caution, though, with the so-called “safe haven” utilities sector gaining ground in August.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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